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8 Kinds of Insurance: Which might protect your retirement?

| April 20, 2016

Eight Kinds of Insurance

(1) Life Insurance   (2) Long Term Care insurance   (3) Disability Income insurance   (4) Guaranteed (joint) lifetime income   (5) Auto   (6) Home   (7) Umbrella   (8) Professional Liability

Life Insurance 
Life insurance is something you buy for someone else.  If you are part of a couple that are pooling your resources to fund your retirement, life insurance could be a critical element.  As
sume you each will receive a Social Security payment -- so as a couple there will be two monthly payments.  At the first death of the two of you, one Social Security payment stops.  If married, the survivor can choose to receive the deceased spouses’ payment – if larger.  But married or not – before the first death, two Social Security payments were funding your retirement.  And after the first death, there is only one Social Security payment.

Similarly with a pension.  If either of you has a pension that does not continue 100% at the death of the pension participant, then your retirement income takes a hit.  Sometimes a pension will pay 50% to a survivor.  I “rarely say never,” but it is nearly always worthwhile to get a professional analysis on when it might be a good idea to take the higher “single life” pension benefit instead of the probably lower benefit for a surviving spouse.  There is even a technique out there called “Pension Max.”  I understand it.  But I might only consider using it if the pension payor is an entity in financial trouble.  The PBGC might help.  But a pension payment from a failed entity might be smaller due to a “financial haircut” imposed by the PBGC.

Disability Income Insurance 
If you are an individual or if as a couple you have enough resources to retire now, then Disability Income insurance might be something you can do without.  DI insurance only applies if you are working, not already retired.  If you plan to be working several more years, your retirement funding benefits two ways:  (1) Additional retirement savings deposits. (2) You are hopefully not yet spending any of your future retirement income.  So if you stop working, or if you become disabled and can not continue to earn income, your retirement takes two hits.

Disability Income Special Case:  If you will be working for many more years and have a choice (sometimes you don’t due to group DI) consider the flavor of DI that will also help contribute to a retirement account – in addition to paying out a monthly benefit to help you cover some normal living expenses while you are disabled.

Long-Term Care Insurance (LTCi) 
The United States is not a third world country.  So if you are unable to take care of yourself (can’t perform 2 of 6 “activities of daily living,” for example) you will get care.  The question is – who will pay for your care?  If your resources are very limited, Medicaid will pay for your care.  And you’ll not necessarily get to choose many things about your care.

If you have significant resources, you will pay for care out of your own resources.  If you’re a single individual, that structure is not necessarily a problem.  But if you have a significant pension and / or Social Security payment and / or 401k / IRA to help fund the retirement of a couple, the trailing / healthy partner might be left with dramatically smaller financial resources.

Flavors of LTCi:  This is a subset of the above topic.  Traditional LTCi can go up in price and probably will.  And it has little or no asset value.  Money down the tube if not used.  You might consider the kind of LTCi “hybrid” that:  (1) Price is guaranteed – can’t be raised after issue.  (2) Can develop some cash value that you can get back if you don’t need LTCi benefit.  (3) Has a death benefit if  you die without needing LTCi benefit.  (4) Has an LTCi benefit that can not be lowered after issue if you pay the guaranteed premiums.

Guaranteed (Joint) Lifetime Income  This is potentially a big topic that I’ve written about separately.  (Guaranteed Lifetime Income Potential Sources).  As I mentioned in a different post, there are several sources of Guaranteed (Joint) Lifetime Income.  It’s my professional view that having at least one of these sources of Guaranteed (Joint) Lifetime Income is very important – if not absolutely critical – to reaching your retirement goals.  But if your retirement accounts have more than $10 million in them when you begin retirement, even under our current very low interest rate environment, you might be just fine.  But most people prefer having some guaranteed (joint) lifetime income.

Full disclosure:  The above 4 types of insurance are in the “Life Health Annuity” world for which I do hold licenses.  

The last 4 are in the "Property & Casualty" universe - I do not hold those licenses.)  However, the Certified Financial Planner Board of Standards Inc.   [CFP® Board] had some study material on this topic at the time that I was studying for my certificate.)

Auto Insurance  If you own a vehicle, or I suppose even if you don’t own one but you drive one – maybe even e.g. Zip Car etc. – you should consider auto insurance.  You arguably don’t need auto collision insurance if you don’t own a car, but you do need auto liability insurance.  (If someone sues you.)

Homeowner’s / Renter’s Insurance  Depending on whether you own or rent, you need the appropriate insurance to protect your stuff and property.

Umbrella Insurance  This is insurance for a metaphorical “rainy day.”  If you are sued for many different reasons, your auto, homeowner’s or renters’ insurance might cover you.  Or maybe not enough.  Umbrella insurance will cover you more.  Particularly important if you have significant net worth.

Professional Liability Insurance  Errors & Omissions insurance – medical professional would call this Malpractice Insurance but it would offer similar protection.

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